Intercontinental, Access combination: The future shape of competition

The much proposed business combination of Access Bank and Intercontinental Bank, whether good or bad, signals the nature of competition in the banking industry in the years to come.

A brief history of the industry shows that in spite of the many reforms and regimes of regulation, the banking industry has always been dominated by five banks which control not less than 45 per cent of the industry’s total assets, deposit base and loan portfolio.

For example, in 2009, the top five banks controlled 47.8 per cent of total industry deposit and 47.76 per cent of total assets.

Though the regulatory authorities have always complained about the oligopolistic nature of the industry and introducing measures aimed at creating a level playing field, a brief history of the industry indicates that each of the measures, on the contrary, has always reinforced the uneven playing field.

But while the industry has always been dominated by the five banks, the composition of these top banks has never been constant.

For example, at the end of 2001, when universal banking was introduced, the top five banks were First Bank, Union Bank, UBA, Afribank and Bank of the North.

However, by the end of 2006, and with the deadline for banks to meet the N25 billion minimum capital base, the composition changed to First Bank, Zenith, Union Bank, Intercontinental Bank and UBA.

Also by the end of 2008, following the second round of consolidation, the composition changed again to First Bank, Zenith, Bank PHB, Oceanic and Intercontinental Bank.

By the following year 2009, following regulatory intervention and avalanche of lose provisioning the top five banks composition changed to Zenith, First Bank, Access Bank, GTBank and First City Monument Bank.

It is pertinent to note that only First Bank remained in the top five banks’ position in 2009 out of the five leading banks in 2001.

The lesson is that while there would always be uneven playing field in the industry, the top five positions will not be the exclusive preserve of some banks as any bank can break into that elite club of banks as demonstrated by Zenith, Intercontinental, GTBank and Access Bank.

Secondly, while the industry might be intensely competitive, the common denominator that always determines the ability of any bank to break into the top five is a strong retail franchise reflected in extensive branch network and lately robust electronic banking platform.

Ofcourse to achieve this requires deep purse of shareholders’ funds. That is why the top five dominate in deposit base, shareholders funds and assets.

Intercontinental Bank realized this when it was still a merchant bank, hence even before universal banking commenced, it was one of the first merchant banks to convert to commercial bank in 2000 and this followed with aggressive branch expansion driven with technology.

The consolidation exercise enhanced its branch network and eventual launched it into the top five banks.

To complement its emergence, it embraced electronic banking by introducing many e-banking products.

The result is that prior to the 2009 intervention, its deposit base stood at N1.037trn from N35bn in 2002.

Also today, it is the leading bank in electronic banking. For two consecutive years, the bank has dominated electronic banking.

Investigation revealed that in 2010, its e-business unit made profit of N1bn despite its challenges.

Unfortunately, due to huge lose provisioning, its shareholders funds have been wiped out and asset base weakened and as a result lost its position among the top five.

Access Bank is another revelation. As at end of 2001, Access Bank was not even among the top ten banks. But the fortunes of the bank assumed a radical upward trend following the assumption of the Aigboje Aig-Imokhuede led management team.

The team leveraged heavily on the consolidation programme to acquire Marina Bank, Capital Bank and Bancor and thus increased its branch network and most importantly the strong merchant banking franchise of these banks.

Thus by the end of 2006, it had broken into the top ten banks position.

Also, because of its strong corporate governance and risk management practices, courtesy of the GTBank background of the Aig-Imokhuede led management, these were responsible for the bank’s minimal exposure to the kind of loans that caused huge loan lose provisioning for other banks.

Thus it emerged out the crisis with its shareholders funds much intact and as a result the broke into the top three banks in terms of shareholders’ funds.

Thus the proposed business combination of Intercontinental and Access, if approved by shareholders and the regulatory authorities, has interest implications for competition in the industry and would occasion a reordering of the top five banks position.

It is pertinent to note that each of the banks has something to offer to the union such that a business combination of the two banks could displace the likes of First Bank and Zenith from their eminent positions.

For example, the new bank would most likely emerge as the top bank in terms of deposit base.

The new bank would also most likely have the largest branch network of over 475 branches; dominate electronic banking and corporate and public sector segment of the market.

It would also inherit the best and largest workforce motivated by a relatively young and dynamic management in the industry.

With this comes the potential to significantly increase market share as it provides high quality services to a combined customer base of over 3.8 million in turn creating further upside potential for shareholders of the combined entity.